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Strengthening a Vital Lifeline or Snatching it Away?

Submitted on April 26, 2013

Through a web of subsidies called the Universal Service Fund, U.S. telephone subscribers ensure that telecommunications networks are affordable and available in rural areas; that schools, libraries and rural health centers can access basic and advanced services at discounted rates; and low income consumers can still afford basic phone service. This week, a Congressional panel focused on the program that provides discounts on monthly telephone service for eligible low-income consumers to help ensure they have the opportunities and security that telephone service affords, including being able to connect to jobs, family, and 911 services. Although, historically, the low income program has been viewed as a benefit without a vocal constituency, the hearing demonstrated that many consumers rely on support to ensure their connection to vital communications.

Background
On March 7, 2013, House Commerce Committee Ranking Member Henry A. Waxman (D-CA), Subcommittee on Communications and Technology Ranking Member Anna G. Eshoo (D-CA), and Oversight and Investigations Subcommittee Ranking Member Diana DeGette (D-CO) sent a letter to Commerce Committee Chairmen Fred Upton (R-MI), Subcommittee on Communications and Technology Chairman Greg Walden (R-OR), and Oversight and Investigations Subcommittee Chairman Tim Murphy (R-PA) requesting a hearing on the Federal Communications Commission’s (FCC) Lifeline program, which provides low-income Americans with assistance to receive home phone service. The minority leadership pointed out that during the Bush Administration, the FCC adopted a series of decisions that allowed providers beyond traditional landline telephone companies, particularly prepaid wireless carriers, to participate in Lifeline. These decisions have increased enrollment in the program, potentially expanding its benefits to previously unreached low-income Americans. But they also created new risks for waste, fraud, and abuse as highlighted in recent press articles.

Under the leadership of current FCC Chairman Julius Genachowski, the FCC has taken a number of steps to address these concerns. Since 2011, the agency has adopted new rules to reduce instances of duplicative support payments. It subsequently adopted more comprehensive reforms aimed to reduce growth in the fund and ensure that eligibility standards for the program are being met. These actions have already netted over $200 million in savings.

Testimony from the Hearing
On March 26, the majority leadership answered their colleagues' letter agreeing that Congressional oversight of the program is needed. The majority letter noted the program’s rapid increase in size from $800 million in 2009 to $2.2 billion in 2012. FCC reforms, the majority leadership noted, may be slowing growth, but not containing the absolute size of the fund.

The Subcommittee scheduled an April 25 hearing to examine Lifeline and sent these questions to the FCC: Should Lifeline be frozen until pending and additional reforms are fully in place? Should the waiver allowing carriers offering pre-paid service to receive funding, even if they deploy no facilities of their own, be reconsidered? Should the program be put on a budget or placed under a cap, like other programs within the Universal Service Fund? Is a consumer co-payment in order?

On Thursday, April 25, the Subcommittee heard testimony from:

Julie Veach, the Chief of the FCC’s Wireline Competition BureauPhillip B. Jones, Chairman of the Board and President of the National Association of Regulatory Utility CommissionersGeoff Feiss, General Manager of the Montana Telecommunications AssociationJessica Gonzalez, Vice President of Policy and Legal Affairs of the National Hispanic Media CoalitionChristopher Guttman-McCabe, Vice President of Regulatory Affairs at CTIA—The Wireless AssociationBilly Jack Gregg of Billy Jack Gregg Universal Consulting

Chief Veach outlined the FCC’s Lifeline reforms and noted that program is currently on track to save approximately $2 billion by the end of 2014. The reforms include: (1) requiring consumers to provide proof of eligibility at enrollment; (2) requiring consumers to certify that they understand key program rules and to recertify annually their continued eligibility for support; (3) limiting the Lifeline benefit to one per household; (4) eliminating Link Up support for all providers except those that receive high-cost universal service support on Tribal lands; (5) establishing a uniform, nationwide floor for consumers’ eligibility to participate in the program, which states may supplement; (6) enhancing requirements concerning marketing and advertising practices of supported carriers; and (7) putting in place a robust audit requirement for providers entering the Lifeline program and an ongoing independent audit requirement for providers drawing more than $5 million from the Fund. After Lifeline subscribership peaked in August 2012 at 18.2 million, it has declined quickly to 13.2 million this month.

NARUC’s Jones is also a Commissioner with the Washington Utilities and Transportation Commission and offered testimony on the states’ role in combating waste, fraud and abuse in the Lifeline program. He cautioned that the ability of some states to audit and/or investigate waste, fraud, and abuse may be hampered by rules or laws restricting, or removing outright, their authority over wireless companies. In addition, the move to wireless meant the physical connection to the carrier, and the customer to a specific geographic location, was severed. This undermined the first line of defense against duplicative services and ineligible recipients. The creation of “free” plans also eliminated any financial incentive for customers not to seek duplicate services and further weakened the connection the consumer has with providers associated with paying a monthly bill.

Jones commended the FCC for its substantial efforts to address waste, fraud and abuse in the Lifeline program. He highlighted how the FCC has worked closely with NARUC and the states’ Public Utility Commissions (PUCs). “The Congressionally mandated Federal-State Joint Board process was utilized as designed and provided the commission with several recommendations that were subsequently acted upon,” Jones said. Data on the first recertification is now becoming available but an in-depth analysis is needed to identify areas that can be improved going forward. Jones also urged Congress to support the FCC and the Universal Service Administrative Company’s efforts to complete the national accountability and eligibility databases. USAC announced last week that construction of the National Lifeline Accountability Database, or NLAD, has begun and it is expected to be operational later this year. While it cannot eliminate all abuses, this database will certainly very significantly reduce duplicative support nationally, a big step forward.

Despite the savings achieved by FCC’s reforms, warned Geoff Feiss, there is reason to believe that the savings may bottom out in the near future, and the Lifeline Program may return to a pattern of continued growth. Most of the Lifeline Reform Order’s savings have been implemented. Moreover, the level of support for prepaid wireless providers -- combined with a waiver of facilities-based service—appears to create financial incentives for continued entry of prepaid wireless providers into the Lifeline “market.”

The Montana Telecommunications Association suggested that more can be done to optimize efficiencies in the Lifeline Program:

The Lifeline Program is the only universal service program that has not been put on a budget. It’s time to put the program on a budget.

The Lifeline funding mechanism resembles the “identical support” mechanism in the High Cost Program, which the FCC has eliminated because high-cost identical support “bears no relation to the efficient cost of providing mobile voice service.” Thus, MTA recommends that Lifeline support for prepaid wireless providers should be cost-based. Alternatively, the FCC could establish a benchmark support level of $3 for prepaid wireless providers, and wireless providers could provide to the FCC cost data demonstrating why $3 is insufficient.

MTA’s recommendations, Feiss testified, could save the Lifeline Program as much as $1 billion while serving the same number of qualified low-income consumers. Or, if the program were capped at today’s level, MTA’s recommendation would provide room for considerable future growth in low-income subscribership.

Jessica Gonzalez offered the only testimony from the perspective of low income consumers: “The question posed by today’s hearing is whether Lifeline is ‘money well spent?’ I answer with a resounding ‘yes.’” Who does Lifeline serve? One major provider reported that its average Lifeline customer is a middle-aged grandmother, raising her grandchildren on only $12,000 per year. According to another major provider, 79 percent of its customers have a household income of less than $15,000 per year. Nearly a third are over the age of 55 and 36 percent are disabled. Three quarters of this provider’s customers do not have a landline at home and rely exclusively on their wireless Lifeline product. And almost half have never had a wireless phone before. Another provider shared that 74 percent of its Lifeline customers are unemployed with many explaining that they use their Lifeline wireless phone to pursue employment. According to this provider, 20 percent of its Lifeline users are over the age of 66 and 10 percent are veterans of the U.S. armed services. Another recent survey of this provider’s Lifeline customers revealed that 86 percent did not have an Internet connection at home, and 90 percent didn’t have broadband Internet access, further increasing their reliance on their Lifeline phone service. Still another provider shared that 47 percent of its Lifeline customers are over the age of 50 and 13 percent are veterans. Less than 10 percent of this provider’s customers are employed on a full-time basis.

Lifeline, said Gonzalez, removes economic barriers that prevent access to communications services and reaches the exact people that we all want to and must reach. Lifeline provides phone service to more than 15 million Americans, and has the potential to provide service to millions more. Without Lifeline, a substantial number of these people, including many Latinos, would be left behind. “By helping poor people stay connected, we are also advancing a number of other societal goals, such as enhanced education, better healthcare, getting people back to work, and ensuring public safety.” Gonzalez argued that Lifeline should be nurtured and allowed to evolve as envisioned by statute.

Guttman-McCabe offered testimony on the wireless industry’s role in Lifeline, tried to dispel a few popular misconceptions about the program, and offered CTIA’s views on the programmatic reforms recently adopted by the FCC. He noted that data demonstrates that Lifeline has been a critical component in the effort to expand telephone subscribership. The impact of the Lifeline program has been especially dramatic with respect to households with incomes of less than $10,000. Telephone penetration for those lowest income households increased from 80% in 1984 to 92% in 2012. And the gap in telephone subscribership between low income households and all households shrank from more than 11% to less than 4%. But there are still several million American households that lack any phone service.

Lifeline, Guttman-McCabe noted, does not provide cell phones to people – and does not provide low income people subsidized iPhones and iPads. Lifeline subsidies, which are set at $9.25 per month for both wireline and wireless service, only support services, not devices. Smartphones and tablets are not included in the Lifeline program.

Guttman-McCabe argued against some proposals for additional Lifeline reform including:

Freezing the Lifeline programs until the FCC’s 2012 reforms are in place. CTIA believes it is neither necessary nor advisable to freeze the program, as doing so would deny legitimately eligible Lifeline subscribers from accessing the program.

Precluding from Lifeline mobile virtual network operators, which offer service by reselling capacity procured from facilities-based wireless providers. CTIA believes this would deny Lifeline consumers the full benefit of competition-driven value and innovation that characterize the mobile wireless market.

Capping the size of the Lifeline program. Guttman-McCabe pointed to projections of declines in Lifeline demand, alleviating pressure on the fund and diminishing the need for a cap.

Consumer co-payments. CTIA members believe that a minimum charge is unnecessary and perhaps counterproductive.

Precluding wireless entirely from the Lifeline program. CTIA argues that this would violate the idea that universal service policy should be technologically and competitively neutral.

Billy Jack Gregg served for 26 years as the director of the West Virginia Consumer Advocate Division, charged with the responsibility of representing West Virginia utility ratepayers in state and federal proceedings which affected rates for electricity, gas, telephone and water service. He has recently conducted studies estimating each states’ potential maximum Lifeline support needed as indicated by the number of households in those states with income at or below 135% of federal poverty guidelines (FPG). Six states – Oklahoma, Maryland, Alaska, Louisiana, Arkansas, Georgia -- receive more than his estimated maximum. But six states – Montana, South Dakota, Nebraska, Colorado, Hawaii and Wyoming – receive just 10% or less of their potential support based on the number of low-income households.

Gregg suggested more work needs to be done to make Lifeline more accessible to customers that are eligible for its benefits, while at the same time creating proper incentives and safeguards against fraud, waste and abuse. He recommended:

Creating a budget for Lifeline composed of caps on support to individual states. (The caps should be based on the number of low-income households within each state, plus a 5% buffer to account for imprecision and lag in data.)

If demand in a particular state exceeds the cap, then payments to carriers would be proportionately reduced to fit under the cap.

The FCC should conduct multiple pilot programs to determine whether a required minimum contribution from Lifeline recipients is appropriate, and if so, at what level.

The FCC should explore ways to encourage state involvement in providing Lifeline service to as many eligible customers as possible

The program should continue to focus on the customer rather than the carrier. Lifeline recipients should receive the same level of subsidy regardless of the service they choose - landline, post-paid wireless, pre-paid wireless or broadband. In this way, competition and the market choices of customers will continue to drive the evolution of Lifeline service offerings.

Federal and state governments should continue to promote participation by low income customers in the Lifeline program by removing barriers to participation and encouraging automatic enrollment.

Lifeline and Broadband
At the Benton Foundation, it is hard for us to examine these telecommunication debates without keeping one eye on how they impact the availability and adoption of broadband in the US. The FCC’s Julie Veach tesitified Thursday that, as part of its Lifeline reforms, the FCC adopted clear goals for the program: ensuring the availability of voice and broadband services for low-income Americans and minimizing the burden on the consumers and businesses who contribute to the program. The Commission will measure progress towards these goals by examining, among other things, the relationship between spending on the Lifeline program and penetration rates among low-income consumers.

Believing its reforms are putting Lifeline on a firm footing for the future, the Lifeline Reform Order establishes as a core program goal ensuring universal availability of broadband for low income Americans. Using a portion of the savings from the Lifeline program reforms, the FCC currently has underway a broadband pilot program that will provide data regarding how Lifeline can potentially help efficiently and effectively increase broadband adoption and retention among low-income consumers. The FCC’s Wireline Competition Bureau has initiated an 18-month Broadband Pilot Program consisting of 14 projects. Data from these projects – together with data from other low-income broadband adoption programs around the country, including those funded by the American Recovery and Reinvestment Act, Comcast’s Internet Essentials, Centurylink’s Internet Basics, and the Connect-to-Compete program – will be analyzed to ensure a full understanding of how Lifeline might support broadband.

Along these lines, on April 23, Rep Doris Matsui (D-CA), a member of the Communications Subcommittee, along with Reps Waxman and Eshoo, introduced legislation to further reform and modernize Lifeline(2). The Broadband Adoption Act of 2013 would help bridge the digital divide by making in-home broadband services more affordable across the country. The bill:

Directs the FCC to establish a broadband Lifeline Assistance program that provides low-income Americans living in rural and urban areas with assistance in subscribing to affordable broadband service.

Requires the FCC, in calculating the amount of support, to routinely study the prevailing market price for service and the prevailing speed adopted by consumers of broadband service.

Is technology neutral to promote competition from broadband service providers under the program.

Allows eligible consumers to choose how they would like their Lifeline support- whether for broadband, mobile, basic telephone services or a bundle of these services. The bill clarifies that eligible households will qualify for only one Lifeline support amount for one of those functions, not for multiple purposes.

Requires the FCC to establish a national database to determine consumer eligibility for Lifeline and to prevent duplication.

Encourages the FCC to consider providing a preference to participating broadband service providers that include components involving digital literacy programs as part of their offerings.

Sets eligibility requirements: households must meet federal low-income guidelines or qualify for one of a handful of social service programs including, but not limited to: SNAP, Head Start, WIC, National School Lunch Program, Tribal TANF or Medicaid.